Strong franc chokes Swiss factories already fighting for their lives

Workers hanging a Swiss flag on the parliament building in Bern on Nov 24, 2015.
Workers hanging a Swiss flag on the parliament building in Bern on Nov 24, 2015. PHOTO: REUTERS

ZURICH (Bloomberg) - Nestled on the banks of Lake Zurich, humidifier-maker Condair's factory provided a good living for its 41 workers. Then in November 2014, beset by high manufacturing costs, the company decided to transfer production to Germany. In seven months, Condair's only Swiss plant will wind down for good.

When the Swiss National Bank a year ago on Friday lifted the cap on the franc, allowing the currency to strengthen, it confirmed the company's decision - and its view that the Alpine nation can't compete in manufacturing. In 2012, the most recent year available, Switzerland had the highest labor costs in Europe, at 51.25 euros (S$80) per hour, government figures show. In neighbors Austria, Germany and France, the comparable cost was 29.75 euros, 30.50 euros and 34.25 euros respectively.

"The discussion now ought to be whether Switzerland can afford de-industrialization and sacrificing the real economy," Condair Chief Executive Officer Oliver Zimmerman said from headquarters in the canton of Schwyz. With most sales in euro countries, it made sense to match production to currency, he said. About 95 percent of Condair's goods manufactured locally are exported, with about two-thirds destined for the European Union.

A year after the SNB abandoned its limit, set at 1.20 francs per euro, the currency is 10 per cent higher against the euro. It rose as much as 41 per cent after the move. The SNB argued the risks in sustaining the cap were out of proportion to its benefit to the economy. A stronger franc raises the cost of Swiss-made products elsewhere.

The effect is showing up in new orders received by the Swiss mechanical and electrical engineering industries. They fell 12.8 per cent in the third quarter of 2015 compared with the same period the year before, according to industry group Swissmem. That marked the fourth consecutive quarter of declining new orders in the sector.

As profit margins are squeezed and production facilities close, many Swiss companies, such as textile-machinery maker Rieter Holding and chemical company Lonza Group, have cut jobs in the past year. That's likely to continue, according to economists at Credit Suisse. They predict a loss of 140,000 industry jobs by 2040 - about a third of the total industrial workforce in 2014.

"I don't see any growth drivers on the horizon for the industry in Switzerland," Credit Suisse economist Claude Maurer said by phone. "That means jobs will have to go or to be transferred to other countries."

The seasonally adjusted unemployment rate has risen to 3.4 per cent from 3.2 per cent since the cap was removed, according to official statistics. The Credit Suisse economists expect it to average 3.7 per cent in 2016.

As other companies, such as machine-maker Schweiter Technologies, follow in the steps of Condair and move manufacturing abroad, business leaders in addition to Zimmerman have started raising concerns that the industrial landscape of Switzerland could disappear entirely. Swatch Group chief executive officer Nick Hayek says the strong franc is weighing on exports.

Making matters worse this year will be the expiration of short-term currency hedging that may have helped some Swiss companies weather the strong franc so far.

"There is no hedge left that predates the SNB's removal of the cap," Rene Grieder, chief financial officer at radiator- maker Zehnder Group, said in a telephone interview. "You have to accept a different foreign-exchange environment compared with last year."

Started more than a century ago by Swiss mechanic Jakob Zehnder, the company said in June it would reduce working hours, cut jobs by 10 per cent and move production to the euro region to relieve pressure on margins.

"We have to learn to live with this situation and optimize our structure continuously to make sure we are competitive enough with companies abroad," Mr Grieder said.